Construction Employment Law
Piece Work: Pay Your Employees by the Task Legally
Compensating your workers based on piece work and productivity can be good for you and for them – if you are as diligent in recording hours worked as you are in monitoring tasks completed
In the construction industry, it is common for companies
to pay their "non-exempt" (i.e., hourly) workers on a “piece rate” (i.e., measurable work completed) instead
of by the hour. The purpose of this method of compensation, which is perfectly
legal if properly executed and documented, is to motivate employees to heighten
their productivity beyond what a mere hourly wage would yield.
This article appeared in the August 2012 issue of "The Construction Advisor"
published by Lang & Klain, P.C.
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Piece work is well-suited to industries such as construction, manufacturing,
transportation, etc. – virtually any type of business where the work content can
be predicted. Piece-based compensation is attractive because it can benefit both
the worker and the employer: The worker has the opportunity to increase their
income in return for extraordinary productivity; meanwhile, the employer can
more accurately tie labor costs to output and capacity (e.g., slabs poured,
roofs completed, sinks installed, houses built), and tie budgeted labor costs to
what is actually paid out.
In the News:
to Pay $48,000 in Back Wages, Damages (Arizona Republic, July 26, 2016)
Worker Lawsuits a New Threat to Employers in Wage & Hour Claims
• IRS Offers Tax Relief for Misclassifying Employees as
Unfortunately for many contractors and subcontractors, in the fall of 2011 the
U.S. Department of Labor’s Wage & Hour Division decided to investigate major
homebuilders, and the companies with which they contract, to root out suspected
minimum wage and overtime violations. This summer, Wage & Hour officials
announced locally that electrical contractors are among the industry groups that
the Labor Department is targeting for investigation of "rampant" violations. The trickle-down effect of the
government’s investigation has exposed poor record-keeping and payment practices
of many members of the construction industry, resulting in substantial
assessments and penalties related to payment for piece work.
Where many construction companies and other payers of piece-based compensation
get in trouble is that they neglect to record and observe actual hours worked,
which can put them squarely at odds with the Fair Labor Standards Act (FLSA).
Piece rates require legitimately keeping “two sets of books”: one set that
records hours worked, the other set that records work completed. Reconciling
those sets of records with actual compensation paid allows you to demonstrate to
workers and government agencies that, while you paid by the task, the amount
paid complied with minimum wage and overtime requirements.
Failure to keep track of worker hours and to pay them according to the rules
leaves you open (and largely defenseless) to worker claims that you did not pay
them (a) the minimum wage, (b) overtime or (c) both. Those claims will likely
spark an audit by an investigator from the Wage & Hour Division, an experience
that leaves many employers yearning for the peace and tranquility of an IRS
While your first reaction to learning that one of your workers has reported you
to the Department of Labor is to seek vengeance on them, please note the folly
of that course of action: If you fire or otherwise willfully discriminate
against an employee for filing an FLSA complaint or for participating in a legal
proceeding against you, you are subject to criminal prosecution, a first-offense
fine of up to $10,000, and imprisonment for repeat offenses.
That would be in addition to civil penalties of up to $1,100 – per violation –
for willfully or repeatedly violating the minimum wage or overtime pay
requirements, and in addition to liability for back wages.
If that doesn’t seem sufficiently harsh, any undeposited payroll taxes that are
associated with the back wages are subject to further penalties and interest,
and any employee of your company who could have deposited those payroll taxes
can be held personally liable for them.
More on that: When you pay an employee – whether salary, hourly wage or piece
rate – and withhold taxes from their paycheck, you become a trustee for the
federal government. Withheld payroll taxes are called “trust fund taxes” and, in
the eyes of the IRS, belong to the government. When you fail to pay withheld
payroll taxes to the government, IRC Section 6672(a) imposes a penalty equal to
the entire amount of the trust fund taxes on every “responsible person” who
“willfully” fails to see that the taxes are paid. The IRS can assess the penalty
against any or all responsible persons, without first trying to collect from the
Paying for Piece Work the Right Way
If, at this point in your reading, you have decided to recommit to doing things
right, you are probably more receptive than you were a few minutes ago to a few
On its website, the Wage & Hour Division offers some insight into paying workers
on a piece rate, which is defined as the “regular rate of pay for an employee
paid on a piece work basis ... obtained by dividing the total weekly earnings by
the total number of hours worked in that week.”
Our Wage & Hour friends use this example: One of your workers, who is paid on a
piece work basis, earns $675 in a particular week. In that week, he worked 45
hours. The regular rate of pay for that week equals $15 ($675 divided by 45
hours). In addition to the straight-time pay, the worker is entitled to $7.50
(half the regular rate) for each hour worked over 40 – an additional $37.50 for
the five overtime hours – for a total of $712.50. While the temptation may be
great to “adjust” the number of hours worked to get your worker back down to a
gross pay of $675, don’t do it. For employees subject to minimum wage and
overtime, hours worked are hours worked.
The Wage & Hour Division offers this alternative method of complying with
overtime rules while paying by the “piece”: If you and your worker agree to this
arrangement before the work is performed, you may pay 1.5 times the piece rate
for each piece produced during the overtime hours. The piece rate must be the
one actually paid during non-overtime hours and must be enough to yield at least
the minimum wage per hour.
The recurring theme here is that you must keep track of the worker’s hours. The
FLSA requires that you retain for two years "records on which wage computations
are based.” This includes time cards, piece work tickets, wage rate tables, work
and time schedules, and records of additions to or deductions from wages."
However, for purposes of satisfying the Department of Labor, payroll registers
should be kept for a minimum of three years.
Remaining vigilant about keeping accurate time records
and using approved methods to calculate wages will allow you and your workers to
realize the benefits of piece work, while staying out of the cross-hairs of Wage
& Hour Division investigators.